Greatest harvests can be a problem

When supply rises, prices fall and can lead to the need to seek subsidies.
Monday, September 27, 2004 | 12:00 a.m. CDT; updated 8:23 p.m. CDT, Thursday, July 10, 2008

With the U.S. Department of Agriculture predicting record yields across the Corn Belt, you’d expect to see Boone County farmers letting out their overalls to make room for nature’s bounty.

In Missouri, 2004 average corn production is expected to exceed that of 2003 by 36 bushels per acre, and total production will likely break last year’s record-setting yield by 100 million bushels, putting the state ninth in the nation in total corn production with 417 million total bushels.

But a look at the nuances of corn finance illustrates why even the greatest harvest can prove risky for farmers and costly for taxpayers.

Great yields cause prices to nose-dive, putting subsidies in play. Last April, corn futures reached $3.40 per bushel only to fall to the current local price of $1.86, a level that allows farmers to receive loan deficiency payments. A deficiency payment can be received by applying to the local office of the Farm Service Agency before harvest. The agency distributes deficiency payments for corn after the price falls below the commodity loan rate of $2 per bushel.

From 1998-2002, 551 Boone County farmers received $6.8 million in deficiency payments from the USDA, according to statistics from the Environmental Working Group.

Receiving a deficiency payment does not preclude a farmer from marketing a crop during the growing season, when prices are typically higher, or storing it after harvest in expectation of a rebound. Once the price falls below the trigger price, farmers who still have their crop become eligible for the subsidy, except those who have market loans with the Farm Service Agency.

Melvin Brees, research associate at the MU Food and Agricultural Policy Research Institute, said that way of maximizing a deficiency payment is more speculative than the policy’s original intent because farmers lose the price-protection features of the program before the corn changes hands. Rather than supporting farmers during low prices or providing insurance, the deficiency payment becomes an incentive to play the market.

Farmers like Randy Ridgway, who farms 1,000 acres of corn in Centralia, maximize the subsidy in a more traditional way. Each year Ridgway receives a market loan with 2 percent interest from FSA that guarantees him a price of $2 per bushel but precludes him from taking a deficiency payment.

Ridgway said he prefers the loan because it provides cash to use throughout the growing season and generally reduces risk. Like those more partial to speculation, he plans to store most of this year’s crop and wait for a better price. That way, he pays back Uncle Sam and clears a profit.

Bill Coen, general manager of MFA Agri Services in Centralia, said this year’s crop brought “good activity” in forward contracting — the marketing of a crop before harvest — but added that not all farmers took advantage of the opportunity. He expects a number of farmers without a contract to store their corn commercially, so long as the MFA in Centralia has storage available. He said the massive size of this year’s yield will make it hard to keep every bushel on the farm.

Low prices have also triggered a newer subsidy called a counter-cyclical payment. Cyclical payments were established in the 2002 Farm Bill and can be received by corn producers below the $2.35 trigger price. The payments fluctuate between farmers based on the average yield and acreage of the farm.

Average cyclical payments in 2003 — a much better harvest than 2002 — started out at 7.7 cents per bushel for corn and amounted to $18.2 million dollars in advance payments counting all commodities. If prices remain low, as appears all but certain, farmers should receive larger cyclical payments for this year’s corn crop once the final effective market price is established in October.

Until then, Boone County farmers will be working hard to get in the harvest and keep their fingers crossed.

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